Taxes on consumption and indirect taxes related to the sale of goods and services are levied in practically every country of the world, as are direct taxes on income and capital. Some examples include the following:
United States of America (U.S.A.)
In the U.S.A., each state is empowered to levy its own state sales tax; each county in each state is also empowered to collect taxes related to the sale of goods and services, such that in the U.S.A., there are more than 7500 separate tax collection agencies.
European Union (E.U.)
In the European Union, each member state is empowered to impose a value added tax (VAT) to be applied at every stage of the production of a commodity, and is charged only on the value added at that stage. In E.U. member states, value added taxes are known by the acronyms VAT, CAT, TVA, MWST, IVA, BTW, FPA, MOMS. When the good or service is sold, the VAT paid at earlier stages cannot be reclaimed, and the final purchaser normally becomes liable on the sale of goods and services, at different rates for different goods and services, with different standard rates in different states. The trader must remit VAT on goods sold to the tax collection agency, but the transaction process is burdensome and complex, as any VAT paid by the trader on purchases may be reclaimable.
In Ireland and the United Kingdom, tax on income may be collected at source by the employer in a “pay as you earn” system, where the employer performs the tax transaction with the tax collection agency. Banks are empowered to collect tax at source on interest earned by depositors. As in other countries, income and capital taxes may also be remitted directly by the taxpayer to the tax collection agencies.
Canada
In Canada, a value added tax called GST is imposed.
Australia
In Australia, as well as income taxes and taxes on goods and services, there is a fringe benefits tax and a capital gains tax. The latter is paid on any capital gain or profit made when an asset is sold for more than was paid for it, whether by an individual, company, trust or fund manager.
South Africa
South Africa has a national system of tax revenue generation, with no state, county, or local taxes. National taxes include value added taxes (VAT), sales and import taxes, customs and excise, and income taxes. A skills levy tax at 1% of payroll is collected by employers, but despite the fact that a majority of employers are eligible to reclaim 80% of the total paid, many do not go through the effort of completing the process.
General Remarks:
Indirect taxes may be levied for different types of sale transaction, such as wholesale (business to business), retail (business to consumer), or when importing goods and services (foreign seller, local buyer). Further excise taxes, levies and duties may be imposed on the sale of goods such as alcoholic beverages, tobacco products, and petroleum fuels, and services such as bookmaking on bets.
In general, the burden of compliance and of collecting such indirect taxes falls upon the seller, who also has to remit the tax to a tax collection agency in a separate transaction, at a different time from the original sale transaction.
If the seller is located or domiciled in one state or tax jurisdiction, and the buyer is located in another, the local sales tax at the buyer's location may not be applicable to that sale transaction. The buyer may or may not be liable to a “use tax” or to an import tax, depending upon both the buyer's and the seller's location. In other instances, both the buyer and the seller may each be liable to pay an element of tax in relation to a particular transaction. The particular good or service may be subject to a reduced tax, or be tax exempt so a tax on that sale may not be applicable. All of this places a very considerable bookkeeping and accounting burden on the seller to collect and remit the correct amount of taxes. With interstate commerce, and especially with e-commerce, there is the problem of determining the venue of a transaction, whether a transaction involves a taxable event, and then calculating the applicable taxes for that sale transaction, which can involve considerable complexity.
There will be the inevitable trend for businesses offering goods and services for sale via the Internet to domicile their operations in a location which minimizes liability, or legitimately avoids liability on the seller to collect and the buyer to pay any tax associated with the sale transaction. For example, for many years traditional mail order businesses in the U.S.A. have legitimately located their domicile or nexus in the state of Rhode Island, the smallest state by size and of relatively small population as compared to the rest of the United States of America, such that their customers located in the other 50 states do not pay any local state sales tax. Such a model may easily be followed by a legitimate on-line business operation, even from an offshore tax haven, since on-line retailers likewise do not require to be physically located anywhere near their customers. This has already happened with on-line betting firms, to avoid government taxes on payout of winnings. Governments and revenue agencies around the world recognize such a trend as a potential tax drain, of considerable magnitude. Sales tax may be a state's biggest source of tax revenue in the U.S.A. and VAT accounts for an average of 40% of Europe's tax revenues.
It is accepted by these authorities that, as the volume of e-commerce increases, goods and services sold over the Internet cannot be allowed to avoid such an important tax. Conventional “bricks and mortar” retailers are also put at an unfair price disadvantage. The principle is established that a tax may be levied on a good or service sold electronically, at the rate prevailing in the country where the consumer is located. However, the Internet makes it harder to pinpoint the identity and location of individuals or businesses engaged in taxable activities. A domain name may give no clue as to the physical location of a site. Furthermore, when anonymous digital cash is introduced, potential taxpayers will become even harder to identify. In reality all of this poses not only a legislative difficulty, on an international scale, but also a considerable technical problem in how to integrate the electronic calculation, collection and remission of taxes with the sale transaction itself, in a manner which effectively removes the actual burden of tax collection from the seller. Nevertheless, it ought to be possible to design and implement a more efficient method and means of calculation and collection of the tax or commission element of a sale transaction, in the context of electronic commerce. This is an object of the present invention.
Advances have been made in the development of electronic commerce protocols providing safe mechanisms for performing an electronic sale transaction, such as Secure Electronic Transactions (SET), Secure Key Internet Protocol (SKIP), Secure Socket Layer (SSL). In inter-application cooperation recent developments include the Joint Electronic Payment Initiative (JEPI), and the Java Electronic Commerce Framework and the Gateway model of Sun Microsystems, Inc.
However, such mechanisms only provide for a means of secure payment from the buyer to the seller. Electronic sale transaction mechanisms known in the art in general have addressed a transaction between two parties, a seller and a willing buyer. If the sale price includes a simple commission for a third party, and/or a sales tax to be remitted to a third party, that element of the transaction remains to be carried out or completed in a separate and later transaction, by the seller. What appears to the buyer of a good or service to be a straightforward transaction, is in fact from the seller's point of view not really a single transaction.
Software exists for the calculation of U.S. sales taxes such as that offered by Taxware, Vertex, and TaxBay. Each of these companies provide tax calculation, and in some cases, tax payment software. Such software is useful in automating the correct calculation and application of U.S. sales taxes, and in facilitating correct returns of taxes to be made to the relevant tax collection agencies. Payroll software systems enable calculation and remission of income taxes on behalf of employees in “pay as you earn” systems, in the U.K. for example. However, the process of remitting returns used in order to calculate taxes due is still an entirely separate operation, and existing tax calculation software only simplifies to an extent the collection of such taxes, which is still ultimately the seller's or taxpayer's responsibility. In addition, the automated payment of taxes continues to be handled as an entirely separate operation as well. No existing software provides an integral solution, which completely automates the calculation, collection, and remission of a tax at point of sale, which may even be in real time, in a taxing event transaction between two parties (e.g. buyer and seller, employer and employee) and in a consequent tax remit transaction with a tax collection agency, whether in an e-commerce environment or in a conventional retail or business environment. There are considerable technical challenges from a software engineering viewpoint, in designing such an integral solution, involving the highest levels of security, massive amounts of data throughput, dynamic data tables to instantly reflect changes in tax rates, etc., and scalability to a truly global system for e-commerce and Internet applications. It is an object of the present invention to provide software modules including objects which embody instruction code and data structures to enable just such an integral solution, including real time tax collection, which modules may be distributed in a pervasive manner, such as via the Internet in multiple server locations, as a downloadable client module, embodied in multiple hardware devices such as smartcards, electronic tags, radio frequency identification (RFID) tags.
Many Internet business models have so far been based on the principle of disintermediation, removing a conventional middleman activity entirely from the chain of commerce. On-line selling of items such as books, which are shipped directly from wholesaler to consumer, cutting out the retailer, is one example. The offering of insurance and loan products direct from financial institutions to consumers, cutting out a conventional brokerage service, is another example. However, some embodiments of the present invention use the opposite approach and seek to address the economic and technical problems discussed above, by providing a different model which reintermediates the tax collection process, in effect by providing a new trusted third party or government-certified intermediary to perform the calculation, collection and remission of the tax element of a sale transaction in the background, as part of the sale transaction, on behalf of the seller, or the buyer, as the case may be. The trusted third party may be embodied as a new tax collection service provider operating a centralized tax transaction server system in accordance with one embodiment of the invention, or may be embodied as a novel distributed software module downloaded by a client for performing a combined sale and tax transaction directly by the client in accordance with another embodiment of the invention. In yet further embodiments, in instances where it may be only necessary to remit taxes to a tax collection agency by specified dates in the year, for example as with income and capital taxes, tax payments for an individual taxpayer may be made to an intermediary bank account after automatic calculation and deduction, where the taxpayer may access and modify the account before the tax due date, and where the tax collection agency may be authorized to directly debit the account at the tax due date.
Other embodiments of the present invention follow the disintermediation model to its extreme, by removing all intermediary activity and permitting the tax element of a sale transaction to be remitted to a tax collection agency instantaneously with the sale transaction of a good or service itself, in real time, at point of sale.